Australia cuts interest-rates for the third time in five months

by Shaun Richards

This morning has brought news that we were expecting so let me hand you over to the Reserve Bank of Australia or RBA.

At its meeting today, the Board decided to lower the cash rate by 25 basis points to 0.75 per cent.

This means that the RBA has cut three times since the fifth of June. Thus those who travel in a land down under are seeing a central bank in panic mode as it has halved the official interest-rate in this period. It means that they have joined the central bankers headbangers club who rush to slash interest-rates blindly ignoring the fact that those who have already done so are singing along with Coldplay.

Oh no I see
A spider web it’s tangled up with me
And I lost my head
And thought of all the stupid things I said
Oh no what’s this
A spider web and I’m caught in the middle
So I turned to run
The thought of all the stupid things I’ve done.

If we look at the statement we get a reminder of our South China Territories theme.

The US–China trade and technology disputes are affecting international trade flows and investment as businesses scale back spending plans because of the increased uncertainty. At the same time, in most advanced economies, unemployment rates are low and wages growth has picked up, although inflation remains low. In China, the authorities have taken further steps to support the economy, while continuing to address risks in the financial system.

We can cut to the nub of this by looking at what the RBA also released this morning.

Preliminary estimates for September indicate that the index decreased by 2.7 per cent (on a monthly average basis) in SDR terms, after decreasing by 4.6 per cent in August (revised). The non-rural and rural subindices decreased in the month, while the base metals subindex increased. In Australian dollar terms, the index decreased by 3.5 per cent in September.

So the benefit from Australia’s enormous commodity resources has faded although it is still just above the level last year.

Over the past year, the index has increased by 1.8 per cent in SDR terms, led by higher iron ore, gold and beef & veal prices. The index has increased by 5.2 per cent in Australian dollar terms.

Aussie Dollar

The index above makes me think of this and here is a view from DailyFX.

Australian Dollar price action has remained subdued throughout most of 2019 with spot AUDUSD trading slightly above multi-year lows.

As I type this an Aussie Dollar buys 0.67 of a US Dollar which is down by 6.6% over the past year. The trade-weighted index has been in decline also having been 65.1 at the opening of 2018 as opposed to the 58.9 of this morning’s calculation.

So along with the interest-rate cuts we have seen a mild currency depreciation or devaluation. But so far President Trump has not turned his attention to Australia.

Also if we stay with DailyFX I find the statement below simply extraordinary.

 if the central bank continues to favor a firm monetary policy stance since announcing back-to-back rate cuts.

A firm monetary stance?

Back to the RBA Statement

Apparently in case you have not spotted it everybody else is doing it.

Interest rates are very low around the world and further monetary easing is widely expected, as central banks respond to the persistent downside risks to the global economy and subdued inflation.

As central bankers are pack animals ( the idea of going solo wakes them up in a cold sweat) this is very important to them.

Then we got a bit of a “hang on a bit moment” with this.

The Australian economy expanded by 1.4 per cent over the year to the June quarter, which was a weaker-than-expected outcome. A gentle turning point, however, appears to have been reached with economic growth a little higher over the first half of this year than over the second half of 2018.

Now if you believe that things are turning for the better an obvious problem is created. Having cut interest-rates twice in short order why not wait for more of the effect before acting again as the full impact is not reached for 18/24 months and we have barely made four?

Mind you if you look at the opening of the statement and the index of commodity prices you may well be wondering how that fits with this?

a brighter outlook for the resources sector should all support growth.

Indeed the next bit questions why you need three interest-rate cuts in short order as well.

Employment has continued to grow strongly and labour force participation is at a record high.

With that situation this is hardly a surprise as it is only to be expected.

Forward-looking indicators of labour demand indicate that employment growth is likely to slow from its recent fast rate.

The higher participation rate makes this hard to read and analyse.

Taken together, recent outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment.

Moving to inflation the RBA seems quite happy.

Inflation pressures remain subdued and this is likely to be the case for some time yet. In both headline and underlying terms, inflation is expected to be a little under 2 per cent over 2020 and a little above 2 per cent over 2021.

It does not seem to bother them much that if wage growth remains weak trying to boost inflation is a bad idea. Also if they look at China there is an issue brewing especially as the Swine Fever outbreak seems to be continuing to spread.

Pork prices have surged more than 70% this year in China due to swine fever, and “people are panicking.”

( Bloomberg)

House Prices

These are always in there and we start with an upbeat message.

There are further signs of a turnaround in established housing markets, especially in Sydney and Melbourne.

Yet the foundations quickly crumble.

In contrast, new dwelling activity has weakened and growth in housing credit remains low. Demand for credit by investors is subdued and credit conditions, especially for small and medium-sized businesses, remain tight.

Comment

A complete capitulation by the RBA is in progress.

It is reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target. The Board will continue to monitor developments, including in the labour market, and is prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time.

They like their other central banking colleagues around the word fear for the consequences so they are getting their retaliation in early.

The Board also took account of the forces leading to the trend to lower interest rates globally and the effects this trend is having on the Australian economy and inflation outcomes.

This is referring to the use of what is called r* or the “natural” rate of interest which of course is anything but. You see in this Ivory Tower fantasy it is r* which is cutting interest-rates and not their votes for cuts. In fact it is nothing at all to do with them really unless by some fluke it works in which case the credit is 100% theirs.

Sweet fantasy (sweet sweet)
In my fantasy
Sweet fantasy
Sweet, sweet fantasy ( Mariah Carey )